Question: Suppose 2-year Treasury bonds yield 4.5%, while 1-year bonds yield 3%. r* is 1%, and the maturity risk premium is zero. a. Using the expectations

Suppose 2-year Treasury bonds yield 4.5%, while 1-year bonds yield 3%. r* is 1%, and the risk premium is zero.
a. Using the expectations theory, what is the yield on a 1-year bond 1 year from now? Calculate the yield using a geometric average.
b. What is the expected inflation rate in Year 1? Year 2?

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